Ineos has a £300m plan to make the Scottish plant profitable again

It is not the most prepossessing sight: mud, grass and a vast puddle, surrounded by a labyrinth of pipes and cooling towers, all set against a moody sky.

But this scrap of land is the future of Grangemouth, the Scottish petrochemicals plant owned by Swiss-based Ineos that just six weeks ago came within a whisker of closure. It is the site for a huge £125m ethane storage tank and import facility, the key part of a £300m investment plan aimed at transforming Grangemouth from a loss-making industrial throwback into an instantly profitable business.

That the programme is going ahead at all is due to October’s last-minute reprieve by Ineos’s billionaire majority owner, Jim Ratcliffe. After a bust-up with the unions straight out of 1970s Britain, he was ready to call in the liquidators – until Unite’s dramatic climbdown. Furiously backtracking, the union urged the plant’s 800 workers to sign up to a “warts and all” survival plan that will take £40m off the cost base. It includes a pay freeze and the axing of the final salary pension scheme.

Standing 40m high and measuring 57m across, the tank marks a fresh start for Grangemouth. But it has a wider resonance too: the first tangible symbol in Britain of the shale gas revolution in America that is remodelling the global energy and chemicals markets.

As Calum MacLean, Grangemouth chairman, puts it: “Without the opportunity from US shale gas, there is no question that the Grangemouth petrochemicals plant would close. It’s only because there is this great opportunity to source cheap ethane that we were able to go back to the shareholders and say, please put £300m into this site.”

From the second quarter of 2016, Grangemouth will start importing ethane from the US - the first shale product ever to be landed in Britain. Even after the shipping costs, it will still be 50pc cheaper than the dwindling feedstocks coming out of the North Sea.

The tank, capable of storing 33,000 tonnes of ethane, will feed a chemicals plant consuming 1,500 to 2,000 tonnes a day of the gas for making ethylene – the chemical used in everything from plastic bags to anti-freeze to anaesthetics.

Imports bring a vital new supply source to the declining, and pricey, North Sea feedstocks on which the Grangemouth chemicals plant was originally built. Its task was to process the by-products from the adjacent oil refinery, employing a further 600 workers, that Ineos owns in a 51:49 joint-venture with PetroChina. But feedstocks are down 60pc in the past decade.

The upshot is that Grangemouth’s sprawling KG gas cracker – a spaghetti junction of kit that takes large hydrocarbons and breaks them into smaller ones – is running at only half its 720,000 tonnes a year capacity.

Add in historically high labour costs and here is a recipe for financial ruin – as Grangemouth has been proving, with the past four years showing negative cash-flow of around £130m in 2010, £150m in 2011, £155m in 2012 and a likely £140m this year.

Shutting the chemicals plant would also have led to certain closure of the refinery, whose contract with BP expires in 2017. But US shale has saved the day, as MacLean explains: “By bringing in a second source of feedstock, we can run the cracker at 100pc and produce ethylene on a competitive basis.”

But there is also a subtler reason for Grangemouth’s reprieve – and one that goes to the heart of the changing economics of the European chemicals industry. Of the 46 crackers in Europe, all but four crack naphtha, a liquid mixture of hydrocarbons. Only four are the gas crackers ideally placed to capitalise on cheap shale gas. And Ineos owns two of them: at Grangemouth and Rafnes in Norway.

That, says Tom Crotty, an Ineos group director, was the “primary logic” for keeping Grangemouth open. “From a purely commercial standpoint, we were at the point where we were indifferent to keeping it open,” he says. “The case for putting your money in and getting future earnings was pretty much identical to the case for walking away. From a social perspective we clearly hoped we could keep it open.

“But the strong logic for keeping it open is that there are only four gas crackers in Europe. And for the next 15 to 20 years we think those gas crackers are going to have a fundamental advantage.”

Rafnes is in many respects the model for a new Grangemouth. Not only is it profitable and light years ahead in industrial relations, it’s already halfway through building its own 37m high, narrower storage tank, with fetching views from the roof of the Norwegian fjords.

Rafnes also already has its own import dock – though the ethane currently comes from Norway, not the US. As Geir Tuft, Ineos’s Norwegian-born commercial director for olefins and polymers, notes: “Whatever the Scots may think about importing US shale gas, it’s an even bigger surprise for the Norwegians.”

The logic, though, is inexorable. Norwegian gas feedstocks are also on the wane. So Ineos is investing £100m at Rafnes for the tank, related pipework and a twelfth furnace at the cracker - a spend, says Tuft, with “a quicker payback than the project at Grangemouth”.

Rafnes is already one of Europe’s most efficient ethylene producers, with a cost of production of around $950 (£580) a tonne versus a current ethylene price of about $1,275 per tonne. But when the US ethane starts arriving in 2015, those costs will fall to around $550 – about $100 more than US producers and $200 more than those in the Middle East. Depending on market conditions, Grangemouth has a chance to pretty much halve its costs to about $650-$750 a tonne.

Cutting costs is crucial because as Crotty points out: “Right now American producers are building the equivalent of one-third of their installed base. They don’t need that for their own market. All of it will be aimed at the export market. A lot will go to Asia, because that’s where the growth is, but some will come to Europe.”

Last year European chemicals companies produced about 19m tonnes of ethylene out of a capacity of 22m tonnes. Around 2m tonnes of naphtha cracker capacity is coming out of the market, including the old one at Grangemouth. But analysts predict 3m to 6m tonnes of annual US exports to Europe over the medium term. Says Crotty: “Exports from America will start knocking off some of the guys up here. You have to assume over the next three or four years some are going to hit the wall.”

Some European naphtha crackers could be converted to take ethane imports. But the costs start at around £500m in what is a notoriously cyclical business. And, as Tuft points out, “you’ve also got to be on the coast”.

He reckons only a “handful” of rival crackers could really start importing cheap ethane. They include Italy’s Versalis, which is examining such a move at Dunkirk, and Middle Eastern chemicals group Sabic, the owner of a plant at Wilton on Teeside. But the obvious candidates are thin on the ground.

That all adds up to a serious commercial opportunity for a strike-free Grangemouth – a site Ineos would like to expand by attracting other manufacturing companies, as it has in Antwerp. Says Tuft: “Our philosophy is actually very simple. You’ve got to have good plant, you put the cheapest stuff you can in, you run it hard and sell all you can. Then you match that up with a very strong focus on fixed costs.”